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Corp Bank: Mixed earnings performance - Views on News from Equitymaster
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Corp Bank: Mixed earnings performance
Aug 1, 2013

Corporation Bank declared its results for the first quarter of the financial year 2013-2014 (1QFY14). The bank has reported 19.3% YoY growth in net interest income and negligible 2.1% YoY growth in net profit. Here is our analysis of the results.

Performance summary
  • Net interest income grows by decent 19.3% YoY in 1QFY14, on the back of healthy 17.1% YoY growth in advances.
  • Net interest margin (NIM) more or less remained unchanged at 2.3% levels during the quarter
  • Net NPA (non-performing assets) to advances spiked to 1.65% in 1QFY14 from 1.20% in FY12 despite higher provisioning.
  • Other income grows robust 77.4% YoY in 1QFY14 on the back of strengthened fee income and healthy non-interest income performance.
  • However; net profits report tepid 2.1% YoY growth for 1QFY14 on account of higher provisions and higher tax outgo.
  • Capital adequacy ratio currently stands at 11.3% at the end of 1QFY14 as per Basel III norms.

Rs (m) 1QFY13 1QFY14 Change
Interest income 36,506 42,715 17.0%
Interest expense 28,422 33,068 16.3%
Net Interest Income 8,084 9,647 19.3%
Net interest margin (%) 2.3% 2.3%  
Other Income 3,276 5,812 77.4%
Other Expense 4,662 5,509 18.2%
Provisions and contingencies 2,166 4,470 106.4%
Profit before tax 4,533 5,480 20.9%
Tax 830 1,700 104.8%
Effective tax rate 18.3% 31.0%  
Profit after tax/ (loss) 3,703 3,780 2.1%
Net profit margin (%) 10.1% 8.8%  
No. of shares (m)   152.90  
Book value per share (Rs)* 583.69 650.3  
P/BV (x)   0.4  
* (Book value as on 30th June 2013)

What has driven performance in FY13?
  • While Corporation Bank reported tepid profitability growth for the first quarter, we are not particularly worried as the bank's balance sheet remains resilient. Higher provisions on account of wage revisions and provisions pertaining to tax expenses dented the profitability of the bank. That said, since the asset quality is under control and the return ratios for the bank stand promising, Corporation bank stands stronger vis--vis its peers.

  • After the much volatile NII growth for past 5 years, the first quarter of FY14 witnessed a strong 19.3% YoY growth in NII. Healthy loan book expansion led to strong interest income performance of the bank.

  • Just like previous quarter, Corporation witnessed healthy loan growth on the back of increased traction in retail loans and SME segment despite the challenging environment. Retail book grew by strong 31.4% YoY , while SME and agri segments grew stronger reporting 38% YoY growth each. The retail growth was led by healthy traction in housing portfolio followed vehicles and others. The corporate loan growth stood at 14.9% YoY and the bank continues to be cautious with respect to corporate lending given the challenges. And clearly the bank would continue to focus on retail loan book expansion going forward.

    SME, agri and retail advances see robust growth, CASA moderates
    (Rs m) 1QFY13 % of total 1QFY14 % of total Change
    Advances 985,460   1,153,530   17.1%
    SME 146,640 14.9% 202,290 17.5% 38.0%
    Agri 72,120 7.3% 99,560 8.6% 38.0%
    Retail 198,380 20.1% 260,670 22.6% 31.4%
    Deposits 1,341,030   1,630,160   21.6%
    CASA 277,680 20.7% 311,320 19.1% 12.1%
    Term 1,063,350 79.3% 1,318,840 80.9% 24.0%
    Credit deposit ratio 73.5%   70.8%    

  • The deposits for Corporation bank grew at healthy pace recording robust 21.6% YoY growth. Unlike its peers, the bank reported improved traction in current accounts that grew by 15.2% YoY. CASA, however, shrunk to 19.1% levels and this is the area where the bank needs to lay thrust in order to strengthen its earnings performance. While the term deposits form greater share of total deposit base (at 80.9%), the CASA share stands at poor levels and way below the industry average. The bank is cognizant about the same and intends to capitalize on the growing branch network in order to beef up the low-cost deposit base.

  • A weaker CASA and higher interest costs took a toll on margins during 1QFY14. Consequently, the NIMs contracted though marginally and stood almost flat at 2.3% levels during the quarter. The absence of healthy investment yields and pressures on loan yields would squeeze margins going forward.

  • The whopping 77.4% YoY growth in other income for Corporation bank during the first quarter turned out to be quite impressive. While the core-income reported 17.4% YoY growth, the non-core areas contributed largely to the non-interest income of the bank reporting strong 179.9% YoY growth. The higher treasury gains coming from the G-sec portfolio boosted the non-interest income performance of the bank.

  • The operating expenses for the first quarter reported an increase of 18% YoY. The overall cost-income ratio improved to 39.7% levels from 41.0% a year ago. The widening of income base contributed to the decline in ratio. That said, the bank continues to focus on curtailing the operating expenditure.

  • The Gross NPAs for the quarter increased to 2.4% from 1.7% a year ago. Net NPAs also spiked to 1.65% in 1QFY14 from 1.20% in FY12 despite higher provisioning. While the management stands confident of controlling the asset quality deterioration, the bank's exposure to troubled sectors of the economy such as infrastructure (17.6% of NBC), textiles (4.4%), engineering (3.5%), iron and steel (3.6%) and chemicals (3.3%). The power exposure as a percentage of NBC stands at 10.3% which remains vulnerable to macros. While the NPAs have emerged across sectors, pharma, telecom, infrastructure, textiles and agri have largely contributed to the bad loans during the quarter. The fresh slippages for the quarter went up by 20% YoY and the delinquency ratio stood at 0.74%.

  • The restructured book outstanding at the end of June quarter stood at 78.9 bn and formed 6.8% of total bank credit. Rs 5 bn was added to the restructured assets during the quarter. SEBs and the aviation account (Air India) have largely contributed to the restructuring for the bank.

  • The capital adequacy for the bank stood at 11.3% with Tier I at 7.7% under Basel III norms for 1QFY14.

  • The bank's branch network boasts of 1731 branches and 1569 ATMs as the end of June 2013. The bank opened 24 new branches during 1QFY14.

What to expect?

At the current price of Rs 284, the stock is valued at 0.4 times its FY15 estimated adjusted months book value.

Corporation bank demonstrated a mixed performance for the first quarter of FY14. While the business and revenue growth stood strong, it failed to translate into equally strong earnings. Higher wage provisions, tax expenses and operating costs deterred the profitability of the bank.

Margins too have contracted for the quarter and the pressures stand imminent going forward as the bank may not replicate healthy investment yields as observed during 1Q.

The sturdy other income growth that was backed by treasury gains again stand unsustainable and the bank should continue to lay greater thrust on the core-fee income to boost its income performance.

CASA for the bank continues to remain a weaker link and stands one of the lowest in the industry. Curtailing further the bulk deposit base will go a long way in improving CASA and margins.

The bank plans to open 300 branches and roll out 4000 ATMs during FY14. The bank's increasing footprint across states will add in garnering CASA base and improve upon fee income.

The bank targets to grow its business at 20% YoY backed by 19% YoY growth in deposits and 20% YoY growth in advances. The buoyancy in business growth stands ahead of the industry estimates for the full year.

The bank failed to contain its NPAs below 2% levels for the first quarter and the slippages stood higher. While the asset quality of PSU banks is reflective of subdued economic conditions, Corporation bank still stands better off vis--vis its peers.

Corporation bank's capital ratio at 11% is definitely not strong on relative basis and hence the bank plans to raise capital from the government of India to shore up its capital base.

Therefore, already weak earnings and a capital raise might depress RoEs for the bank in near future. Nonetheless, Corporation bank today stands in a good stead in terms of return ratios in comparison to its peers.

At current levels, the stock is trading well below the book value. We would prefer to wait and watch particularly the shaping up of asset quality of the bank in the light of tough macroeconomic environment; before we recommend our investors to buy into the stock. Hence, we recommend a Hold view on Corporation Bank from a long term perspective, provided exposure to it is less than 3% of one's overall portfolio. Also one needs to keep track of the bank's quarterly performance on the operational front.

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